Medicare Advantage Risk Adjustment Payments: How a Diagnosis Becomes Revenue

Medicare Advantage risk adjustment payments rise when an eligible diagnosis raises a member’s risk score, even if the bill for the visit stays the same. The clinician documents a condition, a coder translates it, the plan submits it, and the Centers for Medicare & Medicaid Services uses eligible diagnoses to calculate the score that changes monthly payment. A provider group may then receive a contractual share. The visit is over. Its diagnosis can keep earning revenue through the payment year.

Those separate transactions explain why a coding correction and a payment correction can be different events. They also explain the incentive behind risk adjustment fraud: an unsupported diagnosis can increase the amount Medicare pays for a patient whose health has not changed.

The Monthly Payment Belongs to the Plan

The Centers for Medicare & Medicaid Services pays the Medicare Advantage organization a monthly amount for each enrollee’s coverage. The plan receives that capitation in advance, adjusted for expected healthcare costs. The clinician’s bill and a medical group’s share of plan revenue travel under different arrangements.

A provider group can have a direct financial interest in a higher risk score. In its Monogram Health settlement announcement, the Justice Department described risk-sharing arrangements that gave the provider an incentive to submit additional diagnoses. Monogram agreed to pay $2.4 million to resolve allegations that it submitted codes that were clinically inaccurate, unsupported, or did not require or affect patient care. The federal payment went to the plan. The provider’s incentive came from its share.

A vendor’s contract can add another financial interest. In the government’s complaint against Independent Health, chart-review vendor DxID pitched its work as costing nothing up front and paid only once the plan was paid, as a percentage of the recoveries it proved.

That pitch ties the vendor’s compensation to the plan’s additional revenue.

Benchmark, Bid, Rebate and Base Rate

A diagnosis changes the risk score used in payment. The benchmark, bid and rebate determine the payment’s other components.

The county benchmark starts with projected fee-for-service spending. The Medicare payment statute assigns higher benchmark percentages to lower-spending counties, and quality bonuses can increase benchmarks.

The plan’s bid is its proposed price for covering the standard Part A and Part B benefit for an average beneficiary, including administration and profit. For an ordinary plan bidding below its benchmark, the payment statute starts with the adjusted bid and adds a rebate. At or above the benchmark, it starts with the adjusted benchmark. When the bid exceeds the benchmark, the member pays the difference as a premium.

The rebate is a share of the savings from bidding below the benchmark. The rebate provision directs it toward supplemental benefits, lower cost sharing and lower Part B or Part D premiums.

The base payment rate, in the HHS Office of Inspector General’s explanation of the risk-adjustment calculation, is the plan’s standardized bid adjusted for the enrollee’s county of residence.

How Does Risk Adjustment Work for Medicare Advantage?

Eligible diagnoses map to hierarchical condition categories, or HCCs. The Centers for Medicare & Medicaid Services combines the applicable HCC factors with demographic factors to calculate the enrollee’s risk score, adjusts that score, then multiplies it by the plan’s base payment rate. Outside the Programs of All-Inclusive Care for the Elderly, the agency uses the 2024 CMS-HCC model for 2026 and will continue using it for 2027.

The inspector general’s payment explanation describes each HCC factor as a measure of expected costs associated with the conditions in that category. Age, sex, Medicaid status, disability, institutional status and whether the beneficiary is new to Medicare can also affect the score.

The hierarchy matters. Within a hierarchy of related conditions, the more severe manifestation takes precedence. Counting codes is not the same as counting separate additions to the score.

Eligibility comes before multiplication. The inspector general describes diagnoses documented during an eligible inpatient stay, outpatient visit or visit with an eligible health care professional, supported by a face-to-face encounter and submitted by the applicable deadline. The agency filters encounter records using acceptable procedure or bill-type codes.

This machinery developed in stages. The Balanced Budget Act of 1997 created Part C as Medicare+Choice and required health-status risk adjustment by January 1, 2000. The diagnosis-based CMS-HCC model followed, beginning its phase-in in 2004. Paying for coverage created a need to predict cost. Making diagnoses part of that prediction gave the documentation a separate financial value.

The Medicare Payment Advisory Commission traces coding differences to more complete documentation, fraudulent diagnostic data and other causes, and before it calculates payments the Centers for Medicare & Medicaid Services applies normalization and a coding-pattern adjustment, 5.90% for both 2026 and 2027. A 2019 study in Health Management Policy and Innovation found Medicare Advantage risk scores fell to about the fee-for-service level under a diagnosis measure that plays no part in payment, the pattern behind coding intensity in Medicare Advantage.

A 2023 USC Schaeffer Center paper found that lower-spending beneficiaries were more likely to switch from fee-for-service Medicare even after accounting for risk factors. Coding changes the diagnoses recorded about members, while that kind of enrollment is favorable risk selection.

The Encounter Date and the Payment Year Are Different Fields

The service year supplies diagnoses used to predict costs for the following payment year. A retrospective chart review adds another date: when the organization extracted or submitted information from the earlier record.

The distinction is concrete in the inspector general’s assessment study. It examined diagnoses on 2022 service records and estimated their effect on 2023 payments. The HHS Office of Inspector General published the report in October 2024. Those dates describe care, payment and oversight, respectively.

The encounter, the submission or correction, and the affected payment period each carry their own date. A vendor’s delivery date tells finance when the file arrived, not when the care occurred or which payments changed.

Diagnoses can also arrive after the encounter, through a health risk assessment, a later review of that assessment’s documentation or a retrospective chart review of the medical record, and each route can contribute different diagnoses about the same member.

$7.5 billion

Estimated Medicare Advantage risk-adjusted payments for 2023 from diagnoses reported only on health risk assessments and reviews of those assessments.

The diagnoses appeared on no other 2022 service records.

The HHS Office of Inspector General raised concerns about inaccurate diagnoses or serious conditions for which members did not receive needed care.

HHS Office of Inspector General, Questionable Use of Health Risk Assessments, October 2024

Taxpayers fund the higher payments. Members may still be missing the care those diagnoses say they need.

Which Submission Reaches the Payment Model?

For non-PACE organizations, the Centers for Medicare & Medicaid Services has used only risk-adjustment-eligible diagnoses from encounter data and fee-for-service claims for payment risk scores since 2022.

An encounter data record is also different from a claim for payment. The agency requires records for items and services furnished to members even when the service does not generate a claim. That distinction becomes especially important under the 2027 payment policies.

Encounter records and linked chart reviews still reach the 2027 payment model, but apart from members who arrive from a different Medicare Advantage parent organization, the agency no longer counts diagnoses from unlinked chart review records.

Audio-Only Modifiers Affect Eligibility

For 2027, the agency excludes diagnoses identified as resulting from audio-only services through modifiers 93 or FQ. Its filtering rule excludes them only when no other service on the encounter is eligible for risk adjustment.

Interactive, real-time, two-way audio and video can satisfy the face-to-face requirement. Audio alone cannot. The agency describes the exclusion as putting its longstanding face-to-face guidance into operation.

Employer Group Plans and End-Stage Renal Disease

Employer group waiver plans do not submit their own bids. These plans exclusively enroll employer- or union-sponsored retirees and eligible spouses. The Centers for Medicare & Medicaid Services instead derives their payment relationship to area benchmarks from other plans’ bid-to-benchmark ratios.

For members with end-stage renal disease, dialysis or transplant status brings a state-based payment rate. Members with functioning-graft status use county benchmark rates. Each status has its own risk-adjustment methodology under the agency’s payment rules. The patient’s renal status therefore affects both the starting rate and the score.

The Multiplication That Turns a Score Into Money

The HHS Office of Inspector General states the payment relationship directly: the enrollee’s risk score multiplied by the plan’s base payment rate equals the risk-adjusted payment to the plan. The score used at that point has already undergone normalization and coding adjustments.

Consider a chart review that adds an eligible condition and increases the applicable payment score. With the base rate unchanged, the multiplication produces a larger plan payment. A provider participating in that revenue receives whatever its agreement provides. A vendor paid on additional revenue has a separate agreement again.

The same diagnosis can therefore matter to the plan, the provider and the vendor for different contractual reasons. Our whistleblower experts connect those payment terms to what the diagnosis actually earned.

A plan may request a medical record to find omitted diagnoses, check a submitted one or support payment validation. What decides the payment is whether findings that would reduce revenue go forward as readily as additions, the question behind one-way chart review.

The HHS Office of Inspector General examines diagnosis submissions and the payments they produce, and the Centers for Medicare & Medicaid Services checks the records behind them in risk adjustment data validation audits.

An internal coding correction can leave the submitted diagnosis earning revenue. In a Medicare Advantage fraud inquiry, a closed worklist item can conceal an unchanged payment input.

When the Diagnosis and the Money Disagree

If you work in coding, clinical care, finance or a review vendor and see unsupported diagnoses producing revenue, speak with our whistleblower experts about the payment trail you know. We connect the clinical evidence, submission decisions and financial incentives into your strongest case, bring in Medicare Advantage whistleblower lawyers who know risk adjustment cases, and stay beside you through the process. A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers.